Posted by: Josh Lehner | February 16, 2018

Oregon Economic and Revenue Forecast, March 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The U.S. economy continues to perform well. Economic growth has picked up in recent quarters and job gains remain strong enough to pull down the unemployment rate even as more individuals are looking for a job. More importantly the near-term prospects for economic growth are good. The business cycle is not yet waning. The tight labor market drives wage growth higher. And as the economy approaches capacity, inflation is set to rise after five years running below target. From this relatively strong cyclical vantage point, the recently passed Tax Cut and Jobs Act by the federal government will boost near-term growth even further. However, longer-run forecasts remain relatively unchanged, in part due to the temporary and expiring provisions in the legislation.

In Oregon, the outlook remains bright as the economy continues to hit the sweet spot. Employment growth is more than enough to meet population gains and to absorb the workers coming back into the labor market. Wages are rising faster than in the typical state, as are household incomes. That said, employment and measures of economic wages have come in below expectations in the second half of 2017. From this somewhat lower starting point, the modest economic boosts provided by federal tax changes results in a relatively unchanged forecast overall.

Since the September 2017 forecast, two significant factors have come into play that have changed Oregon’s General Fund revenue outlook. The first factor, the new federal tax law (Tax Cuts and Jobs Act), stands to reduce state revenues in the near term, and will boost them in future budget periods. The second factor, a potential equity market correction, draws down revenues after a short delay.

Oregon’s tax collections are tied to federal tax law both directly and indirectly.  The starting point for calculating Oregon income tax is taxable income from a filer’s federal return. As a result, most federal changes to what is defined as income, or to what can be deducted or excluded from it, directly feed into Oregon tax collections.  The new 20% federal deduction for pass-through income will feed directly into lower Oregon taxable income, and reduce Oregon revenues.

Ignoring behavioral responses and other dynamic effects for now, static impact estimates suggest that Oregon’s General Fund revenues will be reduced by more than $200 million in the current biennium due to TCJA. This impact reverses during the next decade, increasing revenues by more than $200 million per biennium.  Several provisions contribute to this pattern, including accelerated depreciation (expensing), new inflation factors, expiring individual provisions and repatriated income from multinational corporations. Due to a quirk in current tax law, multinational repatriation represents a near-term revenue loss in Oregon rather than a windfall.

These static revenue impact estimates only tell part of the story, however, as households, firms and tax professionals are all certain to change their behavior in light of the new rules of the game.  Many of these behavioral responses, including the macroeconomic effects, will serve to mute the impact of TJCA on Oregon General Fund collections. While changes in the timing of tax payments are already evident, it will take some time before it becomes clear how many taxpayers will change their filing status in light of TJCA provisions.

Finally, Oregon’s General Fund is sensitive to equity prices, given our dependence on personal income taxes. The performance of equity markets feed into personal and corporate tax liability in many complex ways, but capital gains are the largest single piece. Although housing wealth is playing a larger role in driving taxable capital gains during the current business cycle than in the past, earnings and losses in stock markets account for the lion’s share of movements in taxable capital gains in the typical year.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | February 14, 2018

The Soft Bigotry of Low Economic Expectations (Graph of the Week)

Right now the U.S. economy is near full employment and operating at full capacity. The unemployment rate is low, and set to decline further as job growth continues to outpace labor force gains. Wages are rising, and inflation is picking up after five years of running below target. It is clear the business cycle has not yet waned. However, it is important to keep in mind that when economists talk about GDP being at potential – our office included – it really is a beaten down potential, or one of lower expectations today than a few years ago. Now, it makes some sense that potential GDP is lower today than before the financial crisis, which tends to leave scars and expose issues that take longer to heal. However, just how much lower potential GDP is today remains an open question that relies on estimates and methodological choices to answer. As you can see in this edition of the Graph of the Week, the U.S. economy today is just a bit above the Congressional Budget Office’s most recent estimate of potential GDP. However it remains four percent below their 2014 estimates and eleven percent below their 2007 estimates.

Now, the economy may truly be at capacity and will continue to run into supply side constraints, possibly sooner than expected. However, it may also be further from full employment or potential GDP than is commonly believed. This is why some economists believe that current federal fiscal policy — the combination of tax cuts and spending increases — has relatively limited risks. Or at least risks that skew toward the upside, rather than the downside. As such, to the extent that this fiscal experiment of providing stimulus into a relatively strong economy can wring out those last few percentage points of prime-age employment, or increase business investment and raise potential GDP further, then it is worth taking the opportunity to try. Full employment and a tight labor market do work wonders, even if they cannot cure all ills.

That said, while all of the major studies of the Tax Cut and Jobs Act find the legislation to be stimulative, the impacts on economic growth are very much on the margin. This is in part due to the nature of the legislation, which permanently reduces corporate taxes and provides temporary personal income tax reductions that skew toward high-income households, and in part due to the strength of the business cycle. In a strong economy, government stimulus is more likely to crowd-out private investment and activity than in a weak economy. Furthermore, some of the tax windfall for both individuals and corporations will be saved and not spent or invested in growth enhancing endeavors. You get less bang for your buck due the cyclical strength, and due to the design of the cuts.

Our office will have more on the impacts of tax reform on the economy and state revenues on Friday when we release our next quarterly forecast.

Posted by: Josh Lehner | February 8, 2018

Marijuana: Falling Prices and Retailer Saturation?

Recreational marijuana prices are falling and, in much of the state, retail options are plentiful. It appears to be a cannabis consumer’s dream, or at least what voters hoped for back in 2014 when Measure 91 was passed. Now, it has not been an entirely smooth ride to date, and concerns remain. Chief among them, as the new Secretary of State audit spells out, would be enforcement and ensuring products are tracked and accounted for. Additionally, potential saturation issues for growers, processors, and retailers indicate that some industry shakeout, or market consolidation is likely.

First, marijuana prices are continuing to decline. This is true here in Oregon, and in Colorado and Washington. Much of this is to be expected as businesses become more experienced in the newly legalized industry, which allows for efficiency gains. Furthermore, increased competition can lead to lower prices as well. Now, given Oregon levies the marijuana tax based on price, our office lists price as a risk to the outlook. Lower prices, everything else equal, would lead to lower revenues. However, lower prices should also lead to larger consumption. Demand curves do slope down. Further complicating the marijuana industry is the ongoing presence of the black market, which also competes on price, and can undercut the legal market at least in part due to the lack of regulations, product testing, etc.

While lower prices are a clear boon for consumers, they can lead to problems for some businesses. This is particularly true for those unable to adjust due to their business model, fixed costs, debt loads, and the like. For example, a firm may be profitable at a certain price point, however marijuana prices are falling by 10-20% per year. If that firm is unable to lower its operating expenses enough, accept lower profit margins, etc. then it can be in financial trouble. Grumblings within the industry suggest this is happening, at least in part due to market saturation. Now, is it truly a concern from an industry wide perspective, or from a consumer’s point of view? Unlikely. However, for any particular business it can be devastating.

This second chart tries to frame recreational marijuana market saturation here in Oregon relative to Colorado and Washington. In all three states, the number of recreational marijuana retailers is about the same, or just over 500. However, once you adjust the numbers based on population, it is clear that Oregon has significantly more stores. This does not necessarily mean Oregon is over-stored. It may be, but it may also be the case that the other states are under-stored. In fact, Colorado currently supports more marijuana stores overall due to their robust medical marijuana market. The error bars in the chart are an effort to show both the total number of marijuana storefronts (recreational + medical), in addition to just the recreational stores.

Now, there are an additional 140 or so retailer applications in the OLCC system. Should these stores open, it would push Oregon significantly past Colorado, even on a population adjusted basis. What all of this does mean is there is more competition for every Oregon recreational marijuana dollar, and this will likely increase. As such, average sales per retailer in Oregon are lower, leading to the industry shakeout or market consolidation concerns or expectations. Pete Danko had a good article in the Portland Business Journal recently about this.

As economist Beau Whitney notes, it’s easy to envision a long-run outcome for marijuana that is similar to the beer industry. One segment of the market is mass-produced and lower priced products. This will be the end result of the commodification of marijuana. Margins will be low, but due to scale, businesses remain viable. These are more likely to be outdoor grow operations as well, due to costs. Even in a world of legalized marijuana nationwide, it is plausible that Oregon, along with California, would remain a national leader in this market due to agricultural and growing conditions in the Emerald Triangle.

The second segment of the marijuana market would be similar to craft beer today. This segment would include smaller grow operations of specialty strains, higher value-added products like oils, creams and edibles. Such products will require and command higher prices. However, as our office has noted previously, it is here among the value-added manufacturing processes, in addition to building up the broader cluster of suppliers, and ancillary industries that Oregon will see the real economic impact of recreational marijuana. If all we have are growers and retailers, there will not be a large impact. Furthermore, the long-term potential of exporting Oregon products and business know-how to the rest of the country remains large.

Even if this market bifurcation materializes, it does not mean it will be an entirely smooth transformation. Conditions today are great for consumers, but potentially worrisome for some businesses. It will be interesting to watch how the market and industry continues to evolve. Our office’s forecast expects sales to continue to increase due to both new customers as usage increases and social acceptance of marijuana rises over time, and due to black market conversion. It’s the latter that is the most worrisome from a long-run perspective of industry viability. This is why enforcement and compliance are key issues being addressed by policymakers and industry professionals today.

Posted by: Josh Lehner | February 6, 2018

Reminder: Economic Data Still Healthy

It’s amazing what a little bit of stock market turbulence can do. I mean that in a bad way. As of this writing, both the S&P 500 and the Dow Jones Industrial Average are down around 7% from their recent highs, which brings them back to their… early December 2017 values. While financial markets are worth keeping an eye on, daily fluctuations are not. This is particularly true when there has been no real event or data release to reasonably justify such fluctuations. I like this Tim Duy chart that helps put the current market in context with past cycles. The key point is that equity markets continue to increase even during a Fed tightening cycle (rising interest rates). The current market looks to have accelerated some in recent months, relative to these past cycles, and then seen a moderate correction.

The bigger point here is that the economic data flow continues to be healthy. The charts below show the four main indicators that the National Bureau of Economic Research (NBER) uses to date U.S. business cycles. As of the latest available data, the U.S. is clearly not in a recession yet. Furthermore, if somehow it were in recession, it would take massive data revisions to reveal that the top of the cycle was December or January.

Now, even as expansions don’t die of old age, we know another recession will come eventually. It may even be sooner than many people think. However, as of now the economy is still expanding, and all of the leading indicators are flashing green. That said, the U.S. economy is entering into a different phase of the business cycle. It is or will soon be running up against supply side constraints, which will impact net growth rates moving forward. After a few years of autopilot, the macroeconomic outlook is interesting again. And I largely mean that in a bad way too. It’s not particularly concerning today, just a bit of nervousness as we try to gauge when the economy moves beyond a mature cycle and into the late stages of the business cycle.

Posted by: Josh Lehner | February 2, 2018

Oregon Leading Indicators and the Manufacturing Outlook

When it comes to leading economic indicators they tend to fall into two camps: manufacturing and related measures, and then everything else. Here in Oregon we have two composite leading indicators series, one from our office and one from Tim Duy at the University of Oregon. Broadly speaking, each of these series is about 50-50 in terms goods-producing indicators, and broader economic measures. So when the oil bust and industrial production declines that began in late 2014 hit the data, there was certainly a scare, and a risk to the near-term economic outlook. The U.S. had never seen industrial production declines like that during an economic expansion. We have only seen declines like that during the middle of recessions. The fear was a goods-producing decline could pull the rest of the economy down with it, even as the rest of the indicators continued to flash green. Well, those fears have clearly faded into the rear view mirror. Not only has the manufacturing and goods-producing cycle revived, the near-term outlook continues to look very good.

First, let’s talk leading indicators. Note that the data that our office and Tim uses is a mix of Oregon and U.S. figures given data availability. That said, none of the individual indicators are flashing warning signs today. This is one reason why the near-term economic outlook remains bright. The consensus of forecasters pegs the probability of recession over the next year at just 13% based on the latest Wall Street Journal survey. As I’ve been saying in presentations lately, even if some of these numbers began to turn down tomorrow, it would take awhile before everything devolved into a full blown recession. The data flow is clearly healthy.

In terms of recent performance, we don’t have a lot of Oregon specific manufacturing numbers, outside of employment and wages. So one thing our office looks at is the mix of local industries relative to the U.S. Over the past couple of generations, Oregon’s more modern mix of manufacturing (more aerospace, metals, and semiconductors, less auto parts and textiles) has served us very well. This largely continues to to be the case today as seen in the chart below. The red Oregon lines takes the U.S. industrial production numbers by sectors and re-weights them based on local employment numbers. Over the past year, the Oregon mix of industries has seen better growth than the national mix. This, of course, represents the pulling out of the goods-producing malaise following the oil bust and manufacturing slowdown back in 2015.

Right now the outlook is positive based on stronger domestic demand as the U.S. expansion continues, but also due to a better global economy as well. The International Monetary Fund just recently revised up their estimates for global GDP growth in 2017 and their outlook for 2018 and 2019. Left off the chart are emerging markets, which are growing faster (near 5%) but did not see a upward revision to the outlook.Additionally, the dollar has stopped appreciating, meaning Oregon-made and U.S.-made goods are becoming a bit less expensive to foreign buyers. This should help boost exports and goods-producing industries as well. Note that exchanges rates with Pacific Rim countries – where Oregon trades – aren’t showing quite the same depreciation trends as with the euro which is pulling the U.S. measure down recently.

Putting all of this together shows that the Oregon manufacturing outlook remains positive. Employment has picked back up in the past year and our office’s forecast expects these gains to continue. As noted in the chart below, Oregon’s manufacturing employment today is actually pretty similar to where it stood coming out of the last severe recession in the state – the early 1980s.

Posted by: Josh Lehner | January 31, 2018

Oregon Wages, A 2017 Update

The labor market is tight, the share of prime working-age Oregonians with a job is back to mid-2000s rates across all levels of educational attainment. While this is certainly good news, the question our office is being asked more and more is about wage growth. We have a lot of jobs, but what about wages? What follows are a few of the standard charts our office uses to think about wages in Oregon.

This first chart looks at total wage growth across the state. These measures are a combination of employment, hours worked, and hourly wages. It measures wages, and other wage-related items like bonuses in aggregate, or in total across all individuals working in Oregon. In particular, the dark blue withholding line is what our office really cares about given it is a primary source of state revenues, and what our office forecasts. Over time these measures of wages tend to move together, as you would expect, even as there are brief periods where the series do diverge some. For example, the differences seen in 2007 and 2011 were due to withholding table changes, and not due to economic changes.

All told, total wages in Oregon have been increasing at a relatively strong rate in recent years. However, there has been a slowing in the past 18 months, just like there has been in employment growth. The economy is transitioning down from peak growth rates to something more sustainable over the long-term. Now, a key issue our office is facing is the fact that wages as measured by the BEA have slowed more than withholdings. This difference is something we have been discussing with our advisors in recent quarters. Withholdings tend to outpace other wage measures because they include stock options, and some other items as well. It’s mostly wages, but less a pure measure than the others. But this divergence is something we’re keeping an eye on. For now we are expecting wages to continue to see healthy increases, albeit at a slower pace than a couple years ago.

There is no one wage measure to rule them all, both at the national or state level. There are a number of available data sources, however each has its pros and cons. As such, our office tends to look at all of them to gauge overall trends. Below you can see how each of the most commonly used wage measures in Oregon has evolved in the past decade. Importantly, across all measures we have seen gains. The improvements are even seen in Average Hourly Earnings (AHE) for All Employees, which is a relatively new measure at the state level. It showed no improvements since its inception a decade ago until just a couple years ago. Since then it has gone all hockey stick on us, and is now approaching the gains seen across the other wage measures.

The third chart looks at the past couple of decades of average wage growth across two of these different measures. These local measures of wages are very noisy, hence why our office looks at all the measures to help gauge trends. However here too you can see we have seen wage gains in Oregon, and wage gains that have been on par with last decade, but below the 1990s gains. It is also important to point out that wage gains are seen across all industries and across all regions of the state. These gains cannot be tied directly to one particular sector or one particular regional economy.

I think it is important to take a step back and look at wage growth across different business cycles. In the 1980s, paychecks in Oregon were increasing by about 4% per year, however inflation was a bit faster than this. As such, real, or inflation-adjusted wages in Oregon (and the U.S.) were actually declining. In the 1990s, wage growth was nearly 4.5% annually in Oregon, while inflation was in the 2-2.5% range. As such, real paychecks in Oregon increased by a bit more than 2% annually. During the mid-2000s, and again in today’s expansion, average wages in Oregon are increasing by about 2.5% per year. The difference has been that inflation is lower in recent years than a decade ago. That means, inflation-adjusted wages this cycle have actually increased faster than in the past cycle.

Finally, even as wage growth in Oregon has been nominally slower than in the 1980s and 1990s, and just a bit better on an inflation-adjusted basis relative to the mid-2000s, Oregon’s gains have outpaced the nation. I know this is a damning with faint praise point to make, however it is true. Oregon’s average wage, while still lower than the U.S. overall, is at its highest relative point today since the mills closed in the 1980s. Furthermore, Oregon’s per capita personal income, while still lower than the U.S. overall, is at its highest relative point today since the dotcom crash.

This expansion in Oregon has been better than in much of the country, even if it has been lackluster for a lot of that time. The good news is that the economy is finally getting to where the feel-good nature of the business cycle is here. We are approaching full employment. Wages and household incomes are rising, while poverty and caseloads for needs-based programs are falling. Expectations are for these trends to continue until the next recession comes.

Posted by: Josh Lehner | January 26, 2018

Fun Friday: Insular States vs Cosmopolitan, Origin vs Destination

Oregon’s ability to attract and retain young, skilled, working-age households is one of, if not the key driver of the regional economy over the long-run. If you look at the current population — among U.S.-born residents, we’re excluding international migrants for this analysis — Oregon is about 50/50 in terms of those born in Oregon versus those born in a different state. However if you look at just the adult population (kids don’t really get to choose where they live), Oregon is 43% born in the state vs 57% born in a different state. Clearly, many of the discussions we have around population growth, housing issues and the like have a strong twinge of migration hypocrisy, to say the least.

While we typically talk about migration flows from one place to another, what about migration trends based upon where people are born? We know many of the current residents in Oregon were born outside the state, but where do all of the Oregon-born residents live today? How many have stayed in Oregon, or fled to other states around the country? This is another one of those half-baked ideas that has been floating around in my head and I thought I would share today, being a Fun Friday and all.

What I have done is group all the states into four categories based upon the share of their current population that was born in that state, and the share of all U.S. residents born in that state that still live there.

  • Insular: less migration in from other states, less migration out of native-born
  • Origin: less migration in from other states, more migration out of native-born
  • Cosmopolitan: more migration in from other states, more migration out of native-born
  • Destination: more migration in from other states, less migration out of native-born

I know this sounds a bit confusing, so let’s look at the results and use Oregon as an example. On the horizontal axis you see the share of the current population that was born in that state. For Oregon, that’s 43% (meaning 57% migrant share). On the vertical axis you see the share of adults currently living in the state in which they were born. For Oregon that’s 61% (meaning 39% of Oregon-born citizens have moved to a different state). The divisions into the various groups are relative to the U.S. averages.

The scatterplot can be a bit noisy, but there is a clear spatial pattern to the results that pops out a bit better on a map.

Digging a bit further into the numbers for Oregon shows that, as expected, most of the non-Oregon-born residents today came from California and Washington, while most of the Oregonians who left the state moved to California and Washington as well. People do not tend to move too far away, and usually move to a neighboring state.

Posted by: Josh Lehner | January 18, 2018

3 Places the Labor Will Come From

Given that the labor market will remain tight, and the immense response to the New York Times article recapped yesterday, Bloomberg columnist Conor Sen asked:

This is speculative, but I think there are three sources of potential workers that aren’t really being talking about: people with self-reported disabilities, stay-at-home moms, and young adults.

Let’s start first with people with self-reported disabilities (physical and/or cognitive). Over the past 20-30 years there has been a massive increase in the share of prime working-age adults citing illness or disability as the reason they are not working, or looking for a job. This increase is approximately 3 percentage points of the prime-age population nationwide and 4 percentage points in Oregon. However, as detailed previously, there has not been a corresponding increase in Social Security Disability Insurance, nor a big increase in households reporting disability income. This difference is puzzling.

We previously put forth a few hypotheses to explain the gap, including the possibility of a genuine public health crisis or broader social acceptance of pain. However we also discussed individuals may be trying to save face when answering the question of why they are not working. For example, instead of saying companies would not hire them, they said they had a bad back, otherwise they would work. These can be difficult issues to discuss, particularly with strangers. This hypothesis is one way to help square the differences seen in the data. It can also now be tested as the labor market is tight. Will we see a cyclical decline among this seemingly structural trend?

As luck would have it, economist Ernie Tedeschi was digging into this the other day. (I highly recommend following Ernie on Twitter as he seems to always be conducting fascinating research using microdata.) His latest work shows that individuals who previously cited illness or disability are now flowing back into the labor force in greater numbers. Not a huge increase yet, but some movement in that direction. Furthermore, Ernie also finds that some of those previously citing disability are now switching their responses to other options like school enrollment, or taking care of the kids, etc as the reason for not working. All of this is very interesting and well worth monitoring moving forward. If, somehow, a quarter of the increase in those prime-age Oregonians citing disability returned to the labor force that’s approximately 20,000 potential workers, or around 10 months of job growth. That’s a very big number.

The second group of potential workers are stay-at-home moms. Our office documented the increases seen since 2000 in our previous report. I’m sticking to moms here given that 1 in 5 are not working specifically to stay home and take care of the kids while just 1 in 100 fathers are doing likewise here in Oregon.

As seen in the chart below, labor force participation rates are lower today among Oregon moms with elementary school-age kids or younger. The big unknown, however, is just how much of these trends are economic related, versus societal shifts or simply personal or family preferences. Elementary school students today were all born at the peak of the housing bubble, during the Great Recession or in its immediate aftermath. Job opportunities barely existed for anyone looking, including new moms. It’s possible that todays middle school and high school students were born long enough ago that their moms were able to stay in or enter the labor market under better economic conditions.

High childcare costs, especially in Oregon, and possibly family leave practices may explain the differences seen in mothers of newborns and pre-schoolers. But what about the trends seen among moms of elementary school-age children? This decline of 10-15 percentage points in participation is equal to approximately 20,000 Oregon moms today. Their educational attainment breakdown is 45% high school or less, 22% associate’s or some college, and 34% bachelor’s degree or higher. Clearly, stay-at-home moms are another large pool of potential workers worth watching moving forward.

The third potential source of workers are likely to be young adults — teenagers and college-age kids. As discussed back at Thanksgiving when I begged you to be nice to your nephew, labor force participation rates among this population have fallen around 15 percentage points. However there was a corresponding increase in school enrollment. To the extent that falling participation rates reflect a weak economy where the broken jobs ladder meant there were fewer opportunities for young adults, then we should expect some reversal of these trends in a strong economy. If we do see a reversal, that means it will likely come out of enrollment in higher education.

We’re already seeing this to some degree, however in a strong economy the share of 18-24 year olds enrolled in college likely has more room to decline. Should it return to mid-2000s rates, that’s another 20,000 potential workers as well. Whether or not this would be a good development is an open question. As our office has said previously, the silver lining to fewer young adults working today is that they are learning additional skills in school they can bring to the labor market tomorrow.

Enrollment declines are seen throughout the nation in recent years. Oregon community college enrollments are back to where they were a decade ago. 4 year universities are generally seeing flat to falling enrollments as well. There are a few exceptions, like both Oregon State’s main Corvallis campus and it’s Cascade campus in Bend.

Bottom Line: The labor market will remain tight until the next recession. This is due to the strong economy, which is approaching full employment, but also due to demographics as the Baby Boomer retirements are rising. Likely candidates to boost the labor force include those citing disability as the reason they were not looking for a job, stay-at-home moms, and young adults foregoing higher education. Overall, a tight labor market is pulling more workers back in. We should hope these gains continue as a tight labor market works wonders, even if it does not cure all ills.

Posted by: Josh Lehner | January 17, 2018

Tight Labor Markets Work Wonders (Graph of the Week)

Over the weekend, Ben Casselman’s New York Times article took the economics profession by storm. That may be an understatement too. The reason is that Ben was able to put a face to, and give real examples of how employers are responding to a tight labor market. Specifically, he highlights a Wisconsin company that hires inmates at market wages ($14/hr). The inmates actually get to keep this money too, or it accumulates in an account until they are released. This story comes on the heels of another one late last year that highlighted a company that employs recovering drug addicts as a way to fill out their workforce. The company even holds, or allows for counseling meetings to take place at the work site in an effort to help their workers stay clean, and thus productive workers as well.

Ben’s article also quotes Larry Summers, a Harvard economist and former Treasury secretary, as saying “When the unemployment rate is lower, employers will adapt to people rather than asking people to adapt to them.” As our office has said in recent years, a tight market means businesses much dig deeper into the resume stack to fill positions. They need to pay more to attract and retain workers. And firms are much more likely to hire individuals with an incomplete skill set, or a gap on their resume. On-the-job training becomes considerably more important in a strong economy.

All of this is true, and I think helped set the stage for the popularity of the New York Times piece. It was a nicely researched, and well-written article that was able to put a face to the economic theory and data. Additionally, these are the types of wild anecdotes that only happen in a strong economy. A tight labor market works wonders. Now, it doesn’t cure all ills. Employing a wider swath of the population, including those with less experience, fewer skills or those previously discriminated against is just a start, but it is a start nonetheless. One of the biggest problems in the past 18 years is the fact that the economy has not been at or, quite frankly, even near full employment for the vast majority of that time.

One piece of research Ben uses in his NYT article to prove his point is looking at the share of the population with a job broken down by educational attainment. Across the U.S. in the recent years, employment rates have risen the fastest among those with less formal schooling. The expansion has clearly spread to all groups. The same is true here in Oregon, as seen in this edition of the Graph of the Week. As noted previously, the share of prime-age Oregonians with a job is back to where it was a decade ago. However, and somewhat surprisingly, this is true for essentially all levels of educational attainment. Tight labor markets and a strong economy do wonderful things. There is a reason the Federal Reserve has a dual mandate. It’s not just price stability, but price stability and maximum employment.

Finally, due to the article and the response among the economics profession, Bloomberg columnist Conor Sen asked what the next group to see stronger employment rates would be. Tomorrow, I take a stab at answering him.

Posted by: Josh Lehner | January 11, 2018

Occupations, Wages, and Educational Attainment

Four year degrees are not the be-all and end-all when it comes to career choices and earnings. Inevitably some dropouts will become successful managers, while some graduate degree holders will continue to work food preparation jobs. However, the correlation between education and pay is strong. The surest path toward a high-wage job in today’s economy is a college degree, and in some cases a graduate degree. That said, it is important to point out that certificate programs, apprenticeships and the like also further individuals’ skills. Workers are more competitive in the labor market provided the training or program itself is actually of value to employers (not all of them are, unfortunately).

What’s interesting when it comes to occupations, wages, and educational attainment is the wide range of outcomes within similar groups. First, let’s talk about the occupations that have high levels of formal education, or the right-hand side of the chart below. Within this group there are those, like computer programmers, doctors, engineers, and lawyers, that earn more than double the statewide median wage. Conversely, other highly educated occupations, while certainly paying more than the median wage, do pay less that these counterparts. Among these are Scientists, Teachers, Community Service (counselors, social workers, clergy, etc) and Arts, Design and Entertainment occupations (includes public relations and media). The majority of these jobs do require a bachelor’s degree and may reflect more of a lifestyle occupational choice than a pure salary story, where the workers enjoy additional nonpecuniary rewards in addition to their salary.

However, what I find most interesting, or among the most important items to note with this research, are the differences among the upper middle-wage occupations. All of these jobs pay approximately the same wage because they are performed by skilled workers, yet require vastly different levels of formal education. You can see this a bit clearer in the chart below. Note that this chart shows the same exact information, however it is zoomed in a bit, and I have changed the color scheme for aesthetic reasons — it looks better for presentations when there isn’t a sea of red.

The differences here are that construction workers and installation, maintenance, and repair workers learn largely on the job, while teachers, librarians and social workers learn in the classroom. Within the job polarization research, the reason for this is that these jobs require abstract thinking and problem solving skills. These occupations also perform nonrountine physical activities and require human interaction, making them harder to automate. Construction and installation, maintenance, and repair jobs are the gold standard for wages when it comes to jobs that largely do not require a college degree. This is one reason why an increased focus, or at least maintaining focus on the trades and apprenticeships and the like is important for both individuals, and the economy at large.

In terms of the outlook, these upper middle-wage jobs can largely be thought of population driven. Stronger population growth leads to increased demand for housing, repair work, police officers, social workers, and teachers. During the strong 1990s expansion, population growth averaged nearly 2 percent per year. It was during this period that Oregon was able to stem the polarization tide, given the strong gains in these types of jobs. In recent years, we have seen middle-wage jobs increase again as the economy has turned around and population growth has picked up. That said, many of these occupations have yet to fully recover all of their lost jobs to date. The outlook calls for ongoing gains as the expansion continues.

Finally, for those interested in more details, the last chart shows more granular educational attainment shares for all occupational groups. The chart is sorted not by median wage but by the share of college graduates, from highest to lowest.

This post was an updated and modified excerpt from our office’s original Job Polarization in Oregon report. I pulled this information for two reasons. First, as mentioned the other day, I am updating and working on some new research regarding the trades and blue collar occupations. And second, at times the reasoning behind these issues, and the labor market outcomes are not discussed enough. Consider this an effort to keep these in mind.

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